And Increases The Value Of Your Rental Portfolio
FINDING THE ONE THING THAT MAXIMIZES CASH FLOW
And Increases The Value Of Your Rental Portfolio
Many of us venture into real estate seeking greater returns, stability, and control over our investments.
Later, some of us find ourselves spending more time managing properties to ensure they are maintained and rented. And we want to maximize cash flow.
Where do we turn? How do we decide on the best action to take in the current market?
Commercial properties are valued based on NOI, or Net Operating Income. Simply put, it is Operating Income less Operating Expenses.
So how do we maximize NOI? Cut expenses? Or obtain more income?
We can only cut so much in expenses.
And the market defines the local rental rates.
So what’s the secret to maximizing cash flow and NOI?
INCOME. First, let’s take a look at operating income. This includes rent, application fees, pet fees, and could include laundry machine income.
Of these different income sources, rental income is the largest. Sometimes rent increases lag behind the market. Rental income is also affected by vacancy.
Application fees and pet fees tend to be smaller, but they are easily implemented.
If there is a common area laundry room there is potential for revenue from coin-operated laundry.
EXPENSES. Next, let’s take a look at operating expenses. They include property taxes, insurance, management, utilities and repairs. How large are these expenses? How much potential for change is available?
Property taxes can be appealed. There is a window of opportunity once a year to appeal your property valuation by the county. If the county appraiser thinks the property is worth significantly more than you do, then there are some potential savings to be had by appealing the valuation.
Insurance can be shopped around to see if there is another carrier that will offer the same coverage for less. Has FEMA revised any flood zones that would affect the property?
Property management may be based on a staffing level or outsourced to a third party. While self-managing may save dollars, this becomes impractical as you scale up to larger properties. Do you have more staff than needed? Do you have the right mix of skills? Is there someone who can do some of the work more efficiently for less?
Who pays the utilities? The tenant? Or you as the landlord? Even if a landlord is limited by meters for electric or water, it is usually possible to implement a system for the tenant to get billed for the utilities.
Depending on the size of the property, there may be a maintenance staff or the repairs could be outsourced. Even with a staff some repairs will likely be done by a third party. What are the most common repairs? What repairs cost the most? Is there a more cost effective way to get these repairs done, such as hiring someone with HVAC or plumbing certifications?
The mortgage falls outside of operating expenses, but significantly impacts cash flow. Refinancing into a mortgage with more favorable terms could be an option.
So with all of these options, how do you find the one thing that maximizes cash flow?
We have an apartment complex that has potential to add value from several areas. There are some vacant units. Some tenants have opted to take advantage of the eviction moratorium and not pay rent.
Some units could be upgraded and command a higher rent.
There was also the opportunity to reduce some expenses. For example, a cable contract could be canceled to reduce utility expense. Hiring a maintenance technician with HVAC skills could reduce outsourced HVAC repairs.
Where should we start?
Last year there were two books I read which impacted the way I look at our business.
One of them was The One Thing by Gary Keller. The other was Who Not How by Dan Sullivan.
As entrepreneurs we wear many hats as we grow our business. The One Thing helps us figure out where to focus our attention.
We asked ourselves, “What is the one thing that we can do now to have the largest positive impact on cash flow?”
We looked briefly at each item that makes up income. And we reviewed the monthly expenses.
For us, the greatest potential was found in filling vacant units.
So we engaged a turn crew to come in and prepare the units for new residents. The turn crew would replace carpet and flooring as needed, paint, and replace cabinets and appliances where appropriate.
Then we had vacant units which were ready to occupy. But the number of qualified applicants was less than the number of units available.
We went back to the same question as before, “What is the one thing that we can do now to have the largest positive impact on cash flow?”, and the answer was the same: Filling vacant units. So now the units were ready but we needed qualified applicants.
We asked, “What can we do today that will bring us more qualified applicants?”.
Our property manager was already promoting the available apartments.
This led to the primary lesson from the other book, ask who, not how.
Who does the best job of advertising apartments for rent? Is it a property manager who has several tasks, including advertising? Or is there a company that does it exceptionally well?
Where do people turn to when looking for an apartment to rent?
A quick Google search confirmed our suspicions. Apartments.com.
After a couple of conversations it was clear that it would be worth the expense to see what kind of results we could get with Apartments.com. They are marketing experts and seem to know the local rental market.
After only one month we were impressed with the results. Our rental inquiries increased six-fold. That not only serves to fill vacant units, but we can be more selective in who we accept. We can choose the best applicants, not merely those who barely meet our criteria.
Is that the answer for every apartment complex? Not necessarily.
So let’s go back to the question, “What is the one thing that can I do today that will have the maximum impact on cash flow?”
This time it might be helping residents apply for rental assistance. Or increase rents if they are below market.
Real estate is a complex investment. There are many opportunities for increasing revenue and reducing expenses. Finding the one thing that maximizes cash flow is a moving target. At one time it can be reducing vacancies, at another it time it may be increasing rents. Once we determine what that one thing is, we implement a plan and evaluate it. Then ask the question again to see what comes next.
LET’S GET TO KNOW EACH OTHER BETTER.
Attune Investments provides a better return for our investors. And we make a positive impact in people’s lives and in our world.
If you want to learn more about how others are investing with us then we invite you to join our club and request a conversation with us. See below.
We have a meetup group called Strategic Multifamily Connections. We meet once a month on the 3rd Wednesday, from 12:00 noon – 1:00 p.m. (Eastern) on Zoom. If you would like to receive the zoom links, click on: MEETUP ZOOM LINKS SIGN UP
Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.
Or you can choose to loan money, get in with a clear return, and get out earlier.
If you haven’t already subscribed to our BLOG, you can increase your knowledge and comfort with this asset class by subscribing now. It’s free. We publish an article every week. SUBSCRIBE HERE And take one more step. Become a member of our ATTUNE INVESTORS CLUB in which you have more personal access to us. JOIN HERE
Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.